Canada’s inflation rate dips to 1.2%

OTTAWA — Canada’s inflation rate tumbled to its lowest level in almost two years last month, falling to 1.2 per cent as Canadians paid less for gasoline, video equipment and some types of clothing, while price gains in many other consumer goods moderated.

Economists had expected a big decline in inflation in May from April’s two per cent, but the actual drop was much steeper and took the consumer price index to the lowest level it’s been since June 2010.

May also saw prices fall outright on a month-to-month basis, meaning the basket of about 175 goods and services that Statistics Canada surveys cost 0.1 per cent less overall in May than it had in April.

Bank of Canada governor Mark Carney said this week he expected prices to dip below his two per cent target in the short term, given the recent drop in world oil prices, but that the underlying core rate — which excludes volatile items such as energy — would hover near the target. He was right on both counts, as core slipped to 1.8 per cent from 2.1 in April.

The combination of softening prices, a weakening global economic outlook and Ottawa’s surprising clampdown on home mortgage rules on Thursday likely takes away any pressure Carney might have felt to start raising interest any time soon. Several economists said this week that given the U.S. Federal Reserve’s continuing dovish position, the Bank of Canada may keep it’s policy setting at one per cent until 2014.

May’s inflation plunge was mostly attributable to gasoline prices, which were 2.3 per cent lower than May 2011, the first outright decline in 23 months. Gas prices also dropped on a monthly basis, dipping 3.5 per cent from April.

Price increases in May included food, up 2.5 per cent; electricity, 5.4 per cent higher; meat, up 6.1 per cent; homeowner replacement costs, up 2.4 per cent, and automobiles, which cost 1.7 per cent more than last year.

In all, seven of the eight major components tracked by Statistics Canada rose, but many by less than a month earlier.

On a monthly basis, women’s clothing, natural gas, automobiles and bakery products were all less expensive in May than they were in April, although there were also increases, particularly in traveller accommodation, fresh fruit, meat and electricity.

Regionally, inflation moderated in all provinces last month. Newfoundland and Labrador continued to post the highest inflation in the country at 2.5, while Alberta remained the lowest at 0.4 per cent.

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